Volatility ETFs Down as VIX Falls Under 12

Volatility exchange traded products such as ProShares Ultra VIX Short-Term Futures (NYSEArca: UVXY) and iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX) fell Monday as the CBOE Volatility Index dropped below 12 for the first time since 2007.

UVXY was down about 5% in midday trading to fall to a new all-time low. Volatility-linked products have been crushed on a declining VIX and “contango” in futures markets. [VIX ETFs: An Imperfect Hedge]

The VIX has fallen to a six-year low as U.S. stock indices such as the Dow Jones Industrial Average break out to record highs. March 9 marked the four-year anniversary of the market bottom from the credit crisis.

The VIX’s long term average is 20.4, according to ConvergEx Group.

“Traditionally high volatility is associated with growth in stock market return, and this low-vol rally is quite the anomaly,” ConvergEx analysts said in a note Monday. “It might be emotionally difficult to buy when fear reigns, but it usually proves profitable. Conversely, putting new money to work when complacency rules – as it does now – is seldom a recipe for success.”

The VIX is known as Wall Street’s fear gauge and rises when investors are seeking protection from stock-market declines in the S&P 500 options market.

Still, Mark Hulbert in a recent MarketWatch article wrote that the VIX leaves a lot to be desired as a market-timing indicator.